Cash vs. Digital: Balancing Financial Inclusion with Innovation in Retail Banking
While the sector is improving at a rapid pace, there are still challenges in the retail banking industry. Patrick Brusnahan speaks to experts in the field to see what some of the biggest upcoming hurdles are
Cashless doing more harm than good
One of the more common challenges in the retail banking industry was figuring out how to turn the consumer cashless. Now, that strategy looks to be a problem in itself; it could actually alienate possible customers.
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David Orme, SVP at IDEX Biometrics, says: “Recent MP warnings that moving to a cashless society will hit the elderly and poor serve as a stark reminder that we cannot take an ‘all or nothing’ approach to becoming a completely cashless society. To ease the move towards cashless, more needs to be done to make sure such benefits are accessible to all.
“Disadvantaged groups are more likely to rely on cash and some, such as those who do not have a bank account, have little choice but to use cash for everything. In 2017, people in the UK made more than 13 billion cash payments. The choice seems clear: either ensure the continued availability of cash or make it easy for all members of society to go cashless.
“The introduction of fingerprint biometric payment cards is just one innovation that will enable consumers to securely embrace cashless payments. This unique and ultimately secure payment solution is virtually impossible to replicate and could actually help to bridge the gap to financial inclusion as transactions will no longer be focused on what we know or can remember (PINs), but who we are. This will, therefore, remove the potential barriers that face those living with dementia or literacy challenges and put consumers at the forefront of payment innovation.”
Getting to grips with Open Banking
It’s been over a year since Open Banking officially “arrived”. However, it has been one of many challenges to make Open Banking actually impact the retail finance industry.
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By GlobalDataMarten Nelson, co-founder, Token.io, says: “All the hype about digital transformation in financial services risks eclipsing something really important: that this ‘new dawn’ of open banking extends only as far as the connectivity layer that enables payments to be authorised. It doesn’t touch the back-end systems that actually move the money.
“For many, this doesn’t matter. For a whole host of payment use cases like e-commerce transactions, domestic account transfers and credit card payments, the fact that the customer’s bank simply adjusts their balance when a payment is authorised is more than enough.”
He adds: “Just don’t go thinking that the journey to digital payments starts and finishes with APIs. The reality is that they’re just a little taste of what’s to come.”
Machine learning
One of the most difficult challenges in the retail banking industry is the rise of machine learning and what the sector does with this.
Ian Bradbury, CTO for financial services at Fujitsu UK and Ireland, says: “According to our own research, 73% of the public believe banking has already been dramatically changed by technology, while 95% of financial services leaders agree technology is driving change in their organisation. Machine learning is a key part of this and, coupled with new technology, it’s set to change the face of the industry entirely.
“For legacy players, the challenge is to understand how the combination of new technology and different consumer behaviour is changing the nature of the banking. They need to rapidly work out how to digitise, simplify and rebuild their processes to become more agile and adapt to this new environment.
“In contrast, start-up banks may be able to embed new technologies, such as quantum, more quickly; but they do not always have the infrastructure to secure their systems, comply with regulation, or develop the policies needed to ensure that technology meets its potential.
“In our modern era of financial services, no organisation is “perfectly” set-up – the speed of change and the transformational nature of it makes that impossible. The key is to be flexible and adaptive enough to be able to take advantage of the enormous benefit on offer from technologies such as machine learning.”
Financial management apps taking attention away from banks
With advanced technology embedded within a simple smartphone, it is possible to be engaged with your money. However, consumers aren’t engaging with their banks. A real challenge for the retail banking industry is getting attention away from fintechs and back to the incumbents.
Garry Larner, Regional Director UK FSI, OutSystems, says: “It used to be said that you were more likely to get divorced than to break up with your bank. Bank account switching has historically been low in the UK with the big four High Street banks enjoying strong brand loyalty. They can’t afford to be complacent, though, as this isn’t the case for younger customers. 82% of millennials are open to switching banks, and just over half of them say they would switch to a different bank if it offered a better mobile app or other superior digital facilities.
“Money management tools are high on the list of factors influencing the choice of bank for younger customers.
“The younger generation is typically far more open about its spending habits and prepared to share valuable data if doing so offers tangible benefits. These might include an app that automatically transfers money from one account to another to prevent it going overdrawn, that automatically sweeps any extra cash into a savings account or provides alerts when better deals on financial products become available. Automation that delivers the best customer outcome without them having to make any effort is a crucial feature across many money management tools.
“As the market changes, both established and challenger banks must create and roll out these kinds of products faster than ever before to compete for increasingly ‘switchy’ customers, and money management tools are a key battleground for differentiation. This demands a swifter, more iterative approach to highly customer-centric product development. Being digital-first is no longer an option for banks, it’s a necessity.”
There are certainly a number of challenges in the retail banking industry. Banks need to face these head on. If they do not, then a younger, faster fintech firm will solve the problem. In addition, if they manage that, customer apathy may also be solved and the tidal wave of switching will begin.
